Mortgage Rates Rise Slightly, but Still Down from June

Depending on who you ask and when you asked them, mortgage rates are either up slightly or down significantly. “The average rate for a 30-year fixed home loan was 5.2% this week, down from 5.32% last week, mortgage company Freddie Mac said. The average rate on a 15-year fixed-rate mortgage fell to 4.69%, down from 4.77%. Five-year adjustable-rate mortgages were 4.82%, down from 4.88% a week earlier. One-year adjustable-rate mortgages fell to 4.82% from 4.94%.” For simplicity’s sake, let’s ignoring the 5 basis point daily fluctuations, and focus on the fact that mortgage rates are well below the highs touched in the middle of June.

There now appears to be a near perfect correlation between prices and consumer demand for mortgages. When rates were rising, mortgage applications fell. Now that rates are easing, applications are rising. If rates do an about-face, however, you can expect demand for mortgages to decline proportionately. “Mortgage rates, however, remained above 5 percent for a seventh straight week. Experts say mortgage rates at 5 percent and below are what is necessary to make a significant impact on home loan demand.” Still, it’s important to look at context. In this case, consider that rates remain only slightly above their all-time lows. If you’re trying to refinance, historical context isn’t helpful. If, on the other hand, you’re planning on taking out a primary mortgage, it probably isn’t prudent to delay.

The only exception to this trend appears to be in rates for jumbo mortgages, which have risen steadily since the credit crisis, and accelerated recently. According to one source, “Before the housing market collapse the difference between true jumbo rates and conforming mortgage rates averaged about 0.25%. Today, the difference is tremendous, over 2%.” Perhaps this is due to a change in banks’ tolerance for risk. Perhaps it is due to a growing incidence of foreclosure in jumbo mortgages. Perhaps it is due to a tightening of Fannie/Freddie mandated lending standards. Perhaps it is due to a combination of the three. [As an aside, this could weigh on prices for luxury homes, which must appraise/sell for less than $417,000 if a conforming mortgage is to be obtained].

As for which direction rates are headed, it’s still anyone’s best guess. The Fed isn’t in any hurry to hike short-term interest rates. Nor is it planning to expand its liquidity program, which has already directed over $1 Trillion into mortgages. Meanwhile, the market seems to be settling around a natural equilibrium of 5%+/-. As I indicated, when rates were well below 5%, applications surged. When rates rose too far above 5%, demand tanked. This suggests that the rate required to clear supply and demand is probably pretty close to current levels. Unless something dramatic happens and/or until there is stronger evidence that the economy is recovering, I don’t personally expect rates to fluctuate much over the next few weeks.